Family Mortgage

[neonplanet40]

Hi guys was just talking to my mum tonight about the house mortgage and stuff. Recently her BF has moved out and it is just me and ehr here. I pay housekeeping etc etc.

But my mum showed me her mortgage. We have a 3 bedroom semi detached house in quite a nice area and have been living here for about 8 years. My mum could not get a full mortgage as she only have a normal working wage job which she gets about £13,000 or so a year? So she went on this co-ownership thing where she basically owns 50% of the house and the council own the other 50% and my mum pays them rent for it.

But in the mortgage my mum pays around £220 a month or roughly £2100 a year. Now here's the kicker she showed me a year statement. Where she paid £2033 or so of a £29,000 mortgage they charged £1340 interest. Is this normal? It seems extorionately high to me. At this rate it would take 47 years to pay of half of a house?!

I know nothing about mortgages to be honest so hopefully someone here can enlighten me.

Thanks

Mark

[Rob_B]

Yup it's a kicker, the amount you actually pay off (after interest) increases as the years pass.

Off the top of my head those figures don't seem extraordinary I'm afraid!

[neonplanet40]

So how do people these days with £100k mortgages ever pay it off? :S if ours is only £28k and will take that long?

[GoNz0]

by paying over £700 a month.... the wife pays the mortgage, i pay the ulility bills, she pays for most of the food but she does earn a lot more than me.

[Domestic_Ginger]

When you consider rental charges, you're not doing so badly. Check out estate agents for house rental!

4.6% interest is okay.

[Mblaster]

I think they simply pay their mortgage at a higher monthly rate. £100,000 repayed over 30 years at 5% interest rate would be £542.09 per month (I used this calculator)

Also, I have no idea what is a good interest rate for a mortgage is, it looks like your mum is paying around 4-5%.

[neonplanet40]

Bah its crazy lol Im not looking forward to having my own. Life of debt is what we live in now i guess

[TheAnimus]

By borrowing as little as possible, and paying it off as swiftly as possible.

I live 10 miles away from work, in the suburbs of London despite it been very probable that I'll always be working in central.

As such I'll have it all paid off in about 7 years.

Conversly a mate of mine is looking to buy with his GF (mistake..!) he will probably be having about £2.5k a month repayments and it will take him 25+ years to get it paid off, madness, why does he 'have' to live so central!

[Barrichello]

Endeavour to get a flexible mortgage, always over pay when you can is the rule, most our pay rises/bonus we always knock off the mortgage, boring i know, but then being debt free gets closer each day.

[Rob_B]

Its not likely that your 28k will take 47years, as I mentioned as you get further along the line your payments start to pay off bigger chunks of capital rather than interest so it accelerates during the latter years. Usually 25yr mortgages are the norm.

[Tumble]

What most people don't realise is that the 6% or whatever they're paying on a mortgage isn't 6% of the sum borrowed - it's 6% EVERY year - that's how the banks make their money out of it. Say I pay £800 a month off - every quarter, I've paid £2400, but I get £2200 interest added on every quarter as well, so by the end of the year, I've only paid off £2k of the capital I've borrowed in real terms. It's devious and evil, but unfortunately there's not a lot you can do about it if you want a mortagage from a legal lender.

[Zak33]

Interest divided by borrowed amount, times 100 give you the interest rate per year.

1340 / 29000 x 100 = 4.62% per annum.

Quite acceptabe and not at all naughty....

Right... here's how it works.

If she's paying £1340 Interest per year, divide that by 12 months in a year... = £111.66 per month interest.

She's paying a total in payments of £220 per month... so about half is interest and half is capital (ie paying off the loan)

She pays £220 per month - the interest of £111 leaves £109 per month paying off the loan.

if it was always like that... you'd have £29000 to pay off with 109 per month
29000 / 109 = 266 months.

266 months / 12 months per year = 22 years.... so no where NEAR 47 years.

AND..... every month that the £109 comes off the mortgage, she owes LESS.. so the interest is fractionally lower too.

Ignoring that it gets lower every month.. lets do it yearly...

£29000 owed now.

12 months of £109 capital paid off (that's the £220 minus the £111 interest, so she's paying off £109 per month) is 12months x £109 = £1308 paid off

the next year she owes £29000 - £1308 = £27,692

So the interest is now charged on £27,692 for the next year.

4.62% interest on £27,692 = £1,279 interest in that year (it was £1,304 last year.. remember that )

But she still pays £220 per month... that's £2640 per year, and with interest taken off (£1279) she clears off £1361 from her mortgage in that year....

£27,692 minus the capital payments of £1361 = £26,331 owed.

And so the next year her interest is 4.62% of £26,331 that she owes.... its getting better....

IF the interest rates go UP... her £220 is less mortgage debt clearance, and more interest.. so it takes longer...and if they go down (unlikely) or stay the same.. it clears faster and faster every year.

Lets look at the value of paying £50 per month EXTRA every month.....

£220 up to £270.

That £50 is £600 per year or pure mortgage clearance.. and it's not just the fact that the mortgae goes down faster.. but the interest that's charged drops faster too.

What's 4.67% of that £600?

600 x 4.67% = £28.. so that's a SAVING of £28 in interest alone in a year.

That's saved £28 in the first year........

The next year she's £628 better off on the mortgage.. and as the extra £50 per month goes in... the saving adds up again.

after another year.... £600 of dough goes in, and that's added to the £628 she saved last year.... and then the interest is saved on ALL of it... 4.68% of £1228 which is £57.

Now... its ACTUALLY done, for most mortgages DAILY ... so that's 4.67% / 365 days = 0.0127945%

I have a mortgage linked to my current account... every day I leave it in there. it saves me a few pence....

Every day that I live my life...I know what's owed on my mortgage.. every day that I DONT but a cup off coffee from Costa... every day I don't but a gadget that I don't really need... saves me money

[Zak33]

and to bring this into sharp relief... I know people with mortgages of £400,000 .

Some are paying close to 5% interest.

They are paying £20,000 per year in INTEREST..........

20 grand....
....

[Rob_B]

and to bring this into sharp relief... I know people with mortgages of £400,000 .

Some are paying close to 5% interest.

They are paying £20,000 per year in INTEREST..........

20 grand....
....

Well they are very silly and/or rich gits!

[directhex]

Mortgages are smelly. I've given my lender something in the region of £36k by now, and paid off about £3k of the actual mortgage value.

[Funkstar]

Its not likely that your 28k will take 47years, as I mentioned as you get further along the line your payments start to pay off bigger chunks of capital rather than interest so it accelerates during the latter years. Usually 25yr mortgages are the norm.

To illustrate this, here's a graph!



As you can see, it's not until year 20+ you start to repay a significant portion of the capital. So they make all their money up front in time for you to be earning higher wages and can afford to pay it off early

However, if you are in the fortunate position to be able to over pay on your mortgage, the over payment goes straight to the capital portion of the loan and you can rapidly reduce the loan. A 10% overpayment a year can take a 25 year mortgage down to about 8 years or so (this was the case the last time I did it about 2 years and two properties ago).